House Prices Are Falling in These Five Overvalued Cities

The booming housing market is finally starting to slow down, as skyrocketing home prices, high mortgage rates and a lack of inventory are causing demand to decline. But even as prices start cooling down after a year of double-digit price gains, the market is still extremely overvalued.

According to the latest data by Moody's Analytics, house prices now exceed their long-run fundamental values by more than 25 percent on a national level, the highest level in more than 30 years of record-keeping.

These are the five metro areas where home prices are most overvalued:

  1. Boise City, Idaho (76.9 percent)
  2. Nashville-Davidson-Murfreesboro-Franklin, Tennessee (63.1 percent)
  3. Austin-Round Rock, Texas (61.1 percent)
  4. Las Vegas-Henderson-Paradise, Nevada (59.2 percent)
  5. Phoenix-Mesa-Scottsdale, Arizona (57.5 percent)
Housing market
A neighborhood in California is shown this file photo. Though home prices have started to drop as demand dwindles, the U.S. housing market remains extremely overvalued. FREDERIC J. BROWN/AFP via Getty Images

But within this apparently grim list, there's good news: though these areas have ranked as the most overvalued in the U.S. for a while now, there's been "little change" in prices in these cities between the first quarter of the year and the second quarter of the year, according to Moody's.

Price growth has peaked in Boise, Austin, Las Vegas and Phoenix on a year-on-year basis, "with many potential buyers increasingly stretched to make monthly mortgage payments." And in some of the most overvalued areas, prices have already started to drop significantly.

In Boise, nearly 70 percent of homes for sale already had a price drop in July, according to Redfin. From June to July, the average home value in Phoenix fell by 2.8 percent. In Las Vegas, average home prices have fallen by $15,000 in July to $465,000, dropping for the second consecutive month, according to Las Vegas Realtors.

In July, Realtor.com reported that the Austin housing market had experienced 32.4% of listings undergo price reductions, with the median home list price then sitting at $620,000.

Nationwide, 32 percent of homes reported a price decline in July compared with 27 percent in June.

"With deteriorating affordability driven by rapid price growth over the past two years and higher financing costs, price appreciation is beginning to turn over in some of the most overvalued markets," Moody's wrote in its report.

This cool-down of home prices, driven by the affordability crisis experienced by many potential home-buyers across the country, is happening slowly, but there's no denying it's ongoing.

According to the latest Federal Housing Finance Agency House Price Index (FHFA HPI) released on August 30, house prices across the U.S. rose 17.7 percent in the second quarter of 2022 compared with the same period in 2021. But within this data, there were signs that the "correction" of the housing market many analysts have foreseen is actually taking place: between April and June, the home price increase was only 4.0 percent.

The incoming home price correction is now widely expected to be even deeper than experts had previously predicted.

"We have marked down our expectations for price declines," Moody's Analytics chief economist Mark Zandi told Newsweek. "We previously expected flat national house prices [next year], now we expect them to be down as much as 5 percent."

"The biggest surprise is how sharply home sales have declined. Both new and existing home sales have fallen very, very sharply," he said.

"I expected them to decline, but not quite as quickly as they have. And I think that goes to show just how significant a hit to affordability the rise of mortgage interest rates has been. But also to investors: they've stopped buying, waiting for prices to decline to get a better opportunity," he added.

Zandi forecasts that in overvalued markets like Boise and Phoenix, home prices could drop by 5 to 10 percent over the coming year. In case of a recession, overvalued markets could see a decline of -15 to -20 percent.